If you are looking forward to going to college and you know you need financial help, you may not give much thought to whether you should take out private student loans or federal student loans. Either way, you will end up with debt, right? The truth is, deciding between private and federal government student loans is not as simple as comparing apples to apples. Your financial future could be affected by your understanding of how these loans differ.
Government Student Loans
Federal loans for students are made by the Federal Government’s Department of Education. When you apply for this type of loan, you must submit a Free Application for Federal Student Aid (FAFSA) form. The information on this form will be used to determine i) how much federal student aid and what types of federal loans you qualify for and ii) your family’s contribution toward the cost of your education.
Private Student Loans
Any loans that are not issued by the federal government are defined as private student loans. Private loans are made by various types of lenders, including banks, credit unions, and lenders that specialize in loans to students. If you don’t meet the criteria set by the lender, you can still get a private loan, but you will need a co-signer who meets the lender’s requirements. In the event that you miss payments or default on the loan, your co-signer will be responsible for your debt.
The Difference in Interest Rates
- Government Student Loans – Interest rates on federal loans do not depend on financial factors such as your or your co-signer’s credit rating and are therefore the same for each borrower. Also, the rate on newly originated Federal Direct Loans does not change throughout the repayment period. Currently, interest rates on federal student loans are based on the 10-year Treasury Note plus a fixed percentage increase depending on the loan type, with a cap set depending on the loan type. For example, direct undergraduate loans are based on the 10-year Treasury Note + 2.05% and are capped at 9.50%, according to the Congressional Budget Office. Student loan rates are set in the spring for each new school year, and they are effective from July 1 to June 30 of the following year.
- Private Student Loans – Interest rates on these loans are set by the lenders and are based on various underwriting criteria including the credit history of you or your co-signer. This means that you may be able to qualify for private student loan interest rates that are lower than government loan interest rates. Additionally, you could be offered a private loan with a variable interest rate rather than a fixed interest rate. Although a variable rate means your rate may go up when you are repaying your loan, the rate could still beat what you would be paying if you had federal loans.
The Difference in Repayment Terms
- Government Student Loans – The repayment terms for federal student loans depend on whether they are subsidized or unsubsidized. Subsidized loans are ideal because the federal government will cover the interest while you are finishing school or in deferment, whereas unsubsidized loans begin accruing interest as soon as they are taken out. Federal student loans also offer options of deferment and forbearance as well as income-driven repayment plans, making these types of loans slightly more accommodating if you may have trouble paying your student loans.
- Private Student Loans – Private student loans come with different repayment plans depending on the lender. A private student loan from ELFI gives you a choice of several attractive repayment options including deferring repayment until six months after graduation. With terms ranging from 5-15 years, you can choose between having lower monthly payments or paying off your loans quicker.*
The Difference in How Much You Can Borrow
- Government Student Loans – The government sets a cap on how much you are allowed to borrow both for each year of college and cumulatively.
- Private Student Loans – At ELFI, we encourage all individuals to explore all scholarship and grant options available. We always advise potential students to go after the “free money” first, as there are thousands of scholarships and grants you can take advantage of each year.
After taking advantage of scholarships and grants, the full cost of your education may not be entirely covered. The next step is to look into Private Student Loan options to cover the remaining amount you need for your education expenses. If you have reached your limit with respect to federal loans, you can also make up the difference with private loans. Private student loans from ELFI can help to bridge the gap.*
Choosing Between Government Student Loans and Private Student Loans
It’s important that you consider all of the differences when deciding which types of loans are best for you. If you need assistance in working through your options, contact ELFI. We have years of experience devoted to helping students realize their college dreams, so don’t wait – give us a call today.*
*Subject to credit approval. Terms and conditions apply.
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